An important activity in all corporations and governments is to prevent the diversion of capital into criminal enterprises. In the mid-1980s, trafficking in illegal drugs in the United States had reached a level where the federal government felt compelled to increase the monitoring of financial transactions for drug related activity. In 1986 the United States Congress modified the Bank Secrecy Act to require all transactions conducted thorough U.S. financial institutions for more than $10,000 to be reported to appropriate government monitoring agencies. The intent of the law was to make drug traffickers fearful of using the U.S. financial infrastructure to allocate capital for drug trafficking enterprises.
The $10,000 reporting threshold was enacted in a time when the financial infrastructure was much more centralized around banks and savings and loan institutions. Perhaps more significantly, the law was enacted when parties had fewer options for transferring money. Credit card transactions where not nearly as commonplace as today, and debit card, stored value card, and ATM card transactions were in their infancy. The majority of financial transactions at that time involved financial accounts administered by government regulated financial institutions (e.g., checking and savings accounts).
After the terrorist attacks of Sep. 11, 2001, the United States required even closer scrutiny of the financial transactions of terrorist organizations was needed. But the ease with which small transactions can be conducted for well under the $10,000 reporting threshold has made monitoring very difficult.
Trying to shrink and recentralize the financial infrastructure for easier monitoring would be nearly impossible and unacceptably costly. Approximately two-thirds of the economic activity in the United States depends on consumer spending. Restricting consumers' payment choices could have a dramatic impact on their spending and the overall economy. Also, the financial infrastructure has been globalized to a great extent, making it impossible for the United States to make dramatic changes without the voluntary cooperation of many other countries. Thus, there is a need for technological solutions that increase the effectiveness of financial transaction monitoring without unduly interfering with the growth and sophistication of our financial infrastructure.
In addition to national security concerns, the challenges posed for monitoring the financial infrastructure poses economic threats to businesses and individuals. The financial industry is well aware of the increased threats of theft and fraud that criminals are exploiting in new innovations of the financial infrastructure. These threats include increased payment card theft, breaches in Internet security, and ever more sophisticated forms of identity theft, among many others. The financial industry is constantly taking steps to improve security in the financial infrastructure. But despite industry efforts, economic losses from financial fraud and theft are now estimated at more than a billion dollars annually, and the losses are growing. A diversion of even a small portion of these losses to finance terrorist activity presents a significant threat to national security. Thus, there is also a need for technological solutions that increase the effectiveness of financial monitoring to stop losses from theft and fraud.
One aspect of financial transaction monitoring is verifying the identity of the parties involved in the transaction. Payment transactions conducted at merchant stores and across the Internet typically involve the use of PIN numbers, passwords, machine address codes, and/or signatures to verify the identities of the parties to the transaction. Thus there is a need for new systems and methods to verify the identities of parties to a financial transaction. These and other problems are address by the present invention.